How To Explain The Difference Between Cryptocurrency and Blockchain To A Newbie

June 23, 2018 3 min read

If “cryptocurrency” and “blockchain” are words you keep hearing during conversations but find yourself just smiling and nodding because you don’t actually they mean, you aren’t alone.

Majority of people still don’t understand the entire concept. ( See more here)

So to get your head wrapped around this concept, let’s start with some basic definitions:

Cryptocurrency – A digital form of currency, independent of any centralized banking system, used for peer-to-peer exchange and spending of virtual cash (eg. Bitcoin).

Let’s break down the term further for better understanding. The word cryptocurrency is a combination of the words ‘crypto’ & ‘currency’. We all get the ‘currency’ part. But the word crypto comes from the fact that most of the cryptocurrencies, use cryptography principles for generation, transfers etc. Cryptography is a branch of computer science that deals with encryption, passwords, & all the security stuff!

Now if you need an analogy to compare this to real money or even stocks, here is how you can put it. – Cryptocurrencies like Bitcoin or Ethereum are like money in terms of value as you can use it to buy goods and services. But unlike money, cryptocurrencies go from one place to the next without ever touching human hands. It’s also like stock because the value fluctuates based on supply and demand. Though unlike stock, there are no dividends, just whatever the cryptocurrency is worth on a given day.

Blockchain – A digital ledger (consider ‘ledger’ a form of database ) used for chronologically and publicly recording cryptocurrency transactions. This technology is the foundation of what makes cryptocurrency trustworthy and unable to be forged.

A very common question that most newbies ask is – ” How can I spend cryptocurrency if I can’t see it?”

That’s when the concept of blockchain is really understood. All cryptocurrency transactions exist in the cloud and on everyone’s computers. As people collect and spend the digital currencies, it gets tracked. No one can see what you have or spent or get, but the system keeps track of it all. It’s a big database that keeps everyone honest.

And this database in simple terms is called blockchain. It’s almost like a virtual accountant that tracks everything.

In short, cryptocurrencies tend to be implemented using a blockchain. So blockchain is the technology and cryptocurrency is the tool. Blockchain powers cryptocurrencies.

To further understand the difference let’s dive deep into features. Understanding the following properties of cryptocurrency and its transactions will help you to understand the basics without too much pain and confusion:

Let’s try and explain it in simple language –

(a) Accessible to Anyone

Anyone can download cryptocurrency software for free. No signup fee. No one to ask permission. No application or approval. Once the software is installed, anyone can get involved.

(b) Users Have Hidden Identities.

Users of cryptocurrency are not clearly connected to the identity of a real-world person but instead functions through an “address”. Although transaction records are public and may be analyzed, attaching an address to an identity is unlikely.

(c) Safe and Secure.

Cryptocurrency’s strength lies in the fact that security comes through cryptography—basically, through math. While the security from brick-and-mortar banks and currencies depends on people and trust, cryptocurrency security relies on technology. Crypto funds are secured in a cryptography system which requires the owner to have a private key. Although an individual user’s computer may be hacked and result in loss of currency, Bitcoin and other cryptocurrency blockchains have never been hacked.

(d) Transactions are Immutable.

Cryptocurrency transactions can’t be changed once they are confirmed. No safety net or backup authority to appeal to. Transactions are completely irreversible. So if you’ve been scammed into sending funds, or if your computer is hacked? Well, you’re just plain out of luck.

(e) Worldwide and Super Speedy.

Cryptocurrency works through a network that makes transactions happen almost instantaneously. The fact that confirmations can happen all over the world means that there’s never a time when the network is sleeping. Funds can be sent locally or globally with the same reliable speed and accuracy.

(f) Token Supply is Limited.

Anyone who has seen a fledgling country’s economy tank because they just keep printing more money knows that currency must be limited in order for it to retain its value. The supply of cryptocurrency tokens is strictly controlled and thereby protected. The value of these funds is not dependent on any government, bank, or political situation.

(g) Not Based on Debts.

Most of the money issued by governments is debt-based, given value only because a state or governing body says that they “owe” you. In most cases, cryptocurrency is not an IOU from another entity and it does not represent a debt. (Ripple is a bit of an exception to this.) Cryptocurrency simply is itself.

Perhaps the most well-known blockchain, next to the bitcoin blockchain, is Ethereum. Its use case is to execute automatic smart contracts in a decentralized way. Here is a good, simple explanation of how Ethereum works :

Getting your head around these basic ideas of cryptocurrency should give you a better working knowledge on how to be involved in the conversation.

So the next time someone brings these terms up or if your mom, dad or sibling asks you about it, you’ll be in a better position to tackle the questions.

Plus understanding this space will help you to decide on what’s the simplest and most profitable way to get involved!

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